TORONTO, Dec 17 (Reuters) - Sun Life Financial Inc
will sell its U.S. annuity business for $1.35 billion to a firm
connected to Guggenheim Partners in a deal that should reduce
the exposure of the insurer's earnings to market swings and
boost its cash levels.

While the deal could bring long-term benefits to Sun Life,
whose earnings have been derailed by wild market swings during
recent years, investors pulled the company's shares down by
nearly 4 percent as the financial terms fell short of initial
expectations.

"The stock's sort of correcting back because the deal isn't
quite as big a windfall as I think the market was anticipating,"
said National Bank financial analyst Peter Routledge.

Delaware Life Holdings, owned by certain Guggenheim clients
and shareholders, will rename itself Delaware Life Insurance Co
following the cash purchase. Guggenheim will provide investment
management services to the new company.

Sun Life, Canada's No. 3 insurer, said last year it would
stop selling variable annuities and individual life products in
the United States to focus more on group insurance and voluntary
benefits.

Variable annuities - retirement products that guarantee the
investor a minimum monthly payment - became a source of earnings
volatility for Sun Life in the wake of the 2008 financial
crisis. That is because low interest rates and Canadian
accounting rules force insurers to take upfront losses on
products that will not come due for years.

"The business makes money, but not enough," said Routledge.

Weak equity markets and low bond yields sent Sun Life's
profit down 87.5 percent during the second quarter of 2012 and
caused losses during the third and fourth quarters of 2011.

EARNINGS HIT

The deal will cut Sun Life's profit by 22 Canadian cents a
share annually and reduce book value by C$950 million ($965
million), the company said in a statement. According to Thomson
Reuters I/B/E/S, Sun Life was expected to earn C$2.53 a share on
a net basis in 2013.

The deal has also prompted Sun Life to take a second look at
its 2015 financial targets, which include a goal of C$2 billion
in operating profit.

In an interview, Sun Life Chief Executive Dean Connor said
he would update the market on the targets after the deal closes,
which is expected during the second quarter next year.

"I'm not saying we will necessarily reduce them. I'm not
saying we will necessarily leave them as they are, because we
don't know yet," he said.

The deal is also expected to reduce the company's earnings
sensitivity to equity markets by 50 percent and its sensitivity
to interest rates by 35 percent, compared with estimates on
Sept. 30.

It will raise Sun Life's cash position to C$1.9 billion.

"Over time, we'll redeploy that cash to fund growth," said
Connor. He said the growth could include acquisitions on the
"smaller end of the spectrum."

Sun Life, which also owns U.S. asset manager MFS Investment
Management, is targeting growth in its Asian business.

SHARES DOWN

Sun Life shares, which have outperformed its rivals with a
47 percent year-to-date rise coming into Monday's session, ended
down 3.9 percent at C$26.74 on the Toronto Stock Exchange.
Despite the strong rise this year, the stock still trades at
less than half its all-time high set in 2007.

Robert Sedran, an analyst at CIBC World Markets, said in a
research note that the earnings and book value reductions were
worse than he had expected.

"Moreover, while the decline in the earnings sensitivity to
market variables improves the risk-reward profile, we did not
view those sensitivities as excessive to begin with," he said.

However, he said the deal will free up time and capital that
would otherwise have been engaged in what is essentially a
closed business, which is a positive.